CP Politics

Experts: S&P Decision Won't Have Much Impact

By Napp Nazworth

August 7, 2011 | 10:46 pm

Standard & Poor's decision to downgrade the United States' credit rating from AAA to AA+ was a hot topic on the Sunday morning talk shows. Liberals and conservatives alike criticized the decision to downgrade, but the path to fiscal stability remained a point of contention.

The Obama administration accused Standard & Poor's (S&P) of “amateurism” in its assessment of the nation's creditworthiness, and pointed to a $2 trillion error in its calculation of future deficits.

Conservative columnist George Will was also critical of S&P's decision, and of the company in general: “Standard & Poor's would have forfeited its good reputation if it had a good reputation to forfeit these days. It missed the entire mortgage-backed securities problem right under its nose. If you read what they actually said it's kind of a half-baked political analysis criticizing the American system of government and how it works. Now they're entitled to their opinion on our politics, but their opinion isn't entitled any particular respect.”

David Beers, head of Standard & Poor's government debt rating unit, appeared on Fox News Sunday to defend the decision.

“That's a complete misrepresentation of what happened,” Beers said, when asked about the $2 trillion error. “We are talking about highly technical assumptions about projection budget baselines far into the future and ... it doesn't change the fact that in our estimation, even with the agreement between Congress and the administration this past week, the underlying debt load of the American government is rising and will continue to rise, most likely over the next decade.”

When asked if the downgrade decision was an attempt to recover S&P's reputation after it failed to warn Wall Street about the housing bubble, Beers replied, “That is completely untrue. As a matter of fact, the group that does government ratings has an excellent track record in terms of what ratings are designed to do, which is provide a meaningful indicator of credit risk.”

All the experts interviewed on the Sunday morning talk shows (Fox News Sunday, This Week and Meet the Press) agreed that S&P's decision would not have much effect on the United States economy or Americans' personal credit.

Beers said, for instance, that what S&P is “actually saying is that there has been a mild deterioration in the country’s credit rating relative to AAA. ... Based upon historical experience, we wouldn't expect that much financial impact ... in terms of higher interest rates, for example.”

Bill Miller, CIO of Legg Mason Capital Management, agreed. “I don't expect that we'll pay more for interest rates,” Miller said on Fox News Sunday, “The downgrade was not an economic event, it was a symbolic and psychological event, an important one,” but, “the U.S. is not a worse risk now than they were two weeks ago.”

Though many agreed that S&P does not have the credibility to judge the United States' creditworthiness, politicians used the occasion to defend their policy views, and critique their opponent’s positions, on fiscal policy.

“I believe, without question, this is the Tea Party downgrade,” Sen. John Kerry (D-Mass.) said on Meet the Press, “It is the Tea Party downgrade because a minority of people in the House of Representatives countered even the will of many Republicans in the United States Senate, who were prepared to do a bigger deal, to do 4.7 trillion dollars, 4 trillion dollars, have a mix of reductions and reforms in Social Security, Medicare, Medicaid, but also recognize that we needed to do some revenue.”

After blaming the Tea Party for the downgrade, Kerry added, “We have to be statesmen here, we have to find the happy middle ground of compromise and common sense. I know John McCain is prepared to do it. I'd like to see the members of the House of Representatives prepared to do it, and that would avoid the future confrontation.”

Sen. John McCain (R-Ariz.) agreed “there is dysfunction in our system” but blamed Obama for his lack of leadership: “The fact is the President never came forward with a plan. I was gratified to hear that he had plans, but there was never a specific plan, there was always the so called 'leading from behind'.”

Rep. Paul Ryan (R-Wis.) argued that S&P's downgrade decision was a “vindication” of Republican policies. Ryan serves as the Chair of the House Budget Committee and was the primary force behind the House 2012 budget. “We passed a budget which, according to someone from S&P yesterday, would have prevented this downgrade from happening in the first place,” Ryan argued.

S&P also said, however, that, besides projecting unsustainable levels of U.S. debt relative to GDP, the downgrade was in part due to the dysfunction shown in the U.S. political system during the debt ceiling debate.

When asked about this, Ryan blamed Democrats for being unwilling to compromise on entitlement spending: “the kind of compromise you need to actually fix the structure of our debt, ... our entitlements, ... the president and the Senate, have always been unwilling to put a specific plan out there to address entitlements, specifically health care entitlements. ... They're unwilling to open up and restructure these entitlements, which, according to S&P, are the primary drivers of this debt.”

Austan Goolsbee left his position as Chair of the White House Council of Economic Advisers on Friday. Appearing on Meet the Press, he said that a genuine economic recovery should be based upon producing more in the private sector, rather than more borrowing and spending.

“The depth of the recession and the nature of it, that it's coming out of a bubble, we can't just go back to what we were doing before the recession began, ... where the growth must come from is business investment, exports, innovation, small business. It can't be just going back to building residential houses and consuming more than we're earning, which were the drivers of growth before,” Goolsbee said.